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US Federal Reserve weighs pros and cons of global stablecoins

Image: Ken Mayer (Flickr)

Mon, 18 Nov 2019, 06:31 am UTC

The U.S. Federal Reserve Board last week weighed on the pros and cons of global stablecoins in the November edition of its “Financial Stability Report.”

The report noted that stablecoins – a type of cryptocurrency with its value pegged to an underlying asset or basket of assets – built on existing large and cross-border customer networks, such as Facebook’s Libra, could achieve widespread adoption. Designed to address the challenge of price volatility seen in cryptocurrencies such as bitcoin, stablecoins could become a new medium of exchange, it said.

“Innovations that foster faster, cheaper, and more inclusive payments could complement existing payment systems and improve consumer welfare if appropriately designed and regulated,” the report said.

However, a poorly designed stablecoin, along with a lack of proper regulation, could negatively affect financial stability. Underscoring the possibility of a stablecoin running into problems in areas such as operation, liquidity, or credit, the report said this could lead to a loss of confidence.

“This loss of confidence could lead to a run, where many holders attempt to liquidate their stablecoins at the same time. In an extreme scenario, holders may be unable to do so, with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability,” it added.

Further noting the risks posed by stablecoins due to their anonymity feature, the central bank emphasized the importance of ensuring compliance with customer due diligence and other anti-money-laundering regulations.

Also, to ensure consumer and investor protection, the Fed said that stablecoin issuers, operators, and intermediaries should fully disclose the terms of their services.

“Disclosures should clearly detail consumer and investor rights and protections, including whether the holder of the stablecoin has any rights to the underlying asset. Issuers should be transparent on how the stablecoin is tied to the underlying asset. Holders must be protected against erroneous and fraudulent transactions and receive recourse in the event of any unauthorized use,” the report added.

The Federal Reserve said that it is cooperating with other regulators to ensure that global stablecoins address “a core set of legal and regulatory challenges before [they] can operate.”

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